Sykes Enterprises Inc (SYKE) Q1 2021 Earnings Call Transcript

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Sykes Enterprises Inc (SYKE)
Q1 2021 Earnings Call
May 5, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to the Sykes Enterprises First Quarter 2021 Earnings Call. [Operator Instructions] On the call today is Sykes management team including CEO, Chuck Sykes; CFO, John Chapman; and IR Head Subhaash Kumar. Management has asked me to relay to you that certain statements made during the course of this call as it relates to the company's future business and financial performances are forward looking. Such statements contain information that are based on the beliefs of management as well as assumptions made by and information currently available to management. Phrases such as our goal, we anticipate, we expect and some expressions as it relate to the company are intended to be forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements were identified in yesterday's press release and in the company's Form 10-K and other filings with the SEC from time to time. I would now like to turn the conference over to Chuck Sykes. Mr. Sykes, Please go ahead.

Chuck Sykes -- President and Chief Executive Officer

Thank you, operator. And good morning, everyone. And thank you for joining us today to discuss Sykes Enterprises' first quarter 2021 financial results. On today's call, I will provide a high level overview of our operating results and John will walk you through the numbers and then we'll turn the call over for Q&A. Our first quarter 2021 operating results were solid on a year-over-year basis and I'm happy to say that our full year 2021 business outlook is now tracking above our initial guidance provided back in February as we continue to deliver for our clients. One year after the pandemic and the lockdowns began globally, we have proved and then continue to improve our operational resilience while highlighting our strategic capabilities. These highly differentiated full lifecycle capabilities span marketing, sales, service and digital transformation. Of course, none of the current successes we are delivering in the face of COVID19 would be possible were it not for the hard work and dedication of our employees worldwide. And we are not letting our guard down and we remain undeterred in our approach to the pandemic, which is to employ the latest safeguards for our employees, while minimizing disruption to them and to their families that financially depend on them.

Turning to the quarter from a revenue standpoint, this was the highest first quarter in the history of the company, even after excluding the Penny Hoarder acquisition. From a growth perspective, first quarter 2021 revenues were up 5.2% on an organic constant currency basis. I hope demand mix between traditional and new economy market segments, as well as existing and new clients, split roughly 50-50 propelled our growth in the quarter. As we continue to help our clients proactively adapt to secular trends driven by digital, which have been accelerated by the pandemic. It is driving a redesign of customer journeys across virtually every product and service category within enterprises. All of this change is boosting demand for our value proposition. And we see the fruits of that in our financial performance. Our deep domain expertise and work from home, for instance, which we acquired back in 2012 and is a core part of our strategic capabilities is just one of the key differentiations that is resonating with our clients and helping us to grow our share. Within the traditional client segment, we are seeing the support opportunities from a broad spectrum of healthcare and financial services, technology and retail providers. We are leveraging our success across our vertical market base to target known global brands and also brands that are national in scope that are either outsourcing for the first time or entering new markets or accelerating their outsourcing.

At the same time, we continue the program ramps across the new economy segment, categories such as ten tag [Phonetic] e-retail, e-commerce and online food delivery, that are similarly you see in solid growth into existing markets and expanding into new geographic markets. On the operating margin front, we are equally proud of our achievement here. We saw expansion in our year-over-year non-GAAP operating margins to 8% from 7.2% in the prior year period. If you strip out some of the noise in the quarter, our first quarter 2021 non-GAAP operating margins were even better reaching a decade high. As we have said, we believe our operating margins have room for further expansion as clients gradually transition from a business continuity mode to a more steady state one, even as COVID lingers in the background. Based on our current client and geographic mix, it is our belief that most clients will have at least 30% of their delivery in the aggregate from home with the remaining 70% from brick and mortar facilities. Currently, that delivery mix is roughly inverse of those percentages. Even if with incremental IT investments and the potential for pricing trade offs due to a changing delivery mix, we believe the resulting facility rationalization along with initiatives are under way to overhaul our operational value chain. We'll provide a further boost margins in the coming years.

And finally, we delivered solid non-GAAP earnings growth for the quarter, up 65.9%. Cash flow from operations was also a first quarter record at $40.2 million. We closed the quarter with a net cash position, which was even higher than the same period a year ago, even as we continue reinvesting in the business as we did with the acquisition of The Penny Hoarder, and return capital to shareholders through share repurchases. So, in closing, we are already off to a strong start with the first quarter results on the heels of a solid 2020 and the upward revision in our 2021 outlook further underscores the business momentum we are capitalizing on. While the pandemic is still with us and some countries that are experiencing second waves, the vaccines, coupled with the lifting of the lockdown, leaves us cautiously optimistic as we forge ahead. While 2020 highlighted our resilience, it also gave us further conviction in the potential of our differentiated full lifecycle value proposition in delivering results for our client and unlocking value for our shareholders.

With that, I would like to turn the call over to John Chapman. John?

John Chapman -- Executive Vice President and Chief Financial Officer

Thank you, Chuck. I would now like to discuss our quarterly financial results, particularly key P&L, cash flow and balance sheet highlights. As Chuck mentioned, we continue our record financial performance. In the quarter, we reported record revenues of $457.9 million versus $411.2 million last year, a growth of 11.4% in the quarter. First quarter 2021 revenues were close to the top end of our revenue outlook range of $454 million to $459 million on a year-over-year compatible basis. First quarter 2021 revenues included a $13.9 million revenue contribution from The Penny Hoarder acquisition and an $11.5 million foreign exchange benefit. Excluding the acquisition and foreign exchange benefit, first quarter revenues were up approximately $21.3 million or 5.2% constant currency, organic revenue growth, thanks to our agility and our diverse business mix. By vertical market and on organic constant currency basis, healthcare was up around 51%; others, which includes retail, up 22%; technology, up around 10%; financial services, up approximately 6%, all of which, more than offset 33% decline in travel and transportation and 7% decline in communications vertical. The tougher comps in communications vertical is expected to lapse in the third quarter of 2021.

First quarter 2021 operating income increased 29.3% to $31.5 million with operating margins increasing to 6.9% from 5.9% for the compatible period last year. On a non-GAAP basis, which excludes the impact of impairment of right-of-use assets and other fixed assets related to COVID19 driven facility exits, acquisition-related intangible amortization.

Merger and integration costs and other costs related facility access, first quarter 2021 operating margin was 8% versus 7.2% in the same period last year. The increase in the comparable operating margin was due to strong overall demand, higher capacity utilization, and cost benefits of COVID19 related facility rationalization, partially moderated by approximately 60 basis points of impact from a true-up in the long-term incentive comp, as well as client ramp costs and IT and IT-related investments to reinforce the company's infrastructure and agility in the marketplace. The year-ago operating margin was also moderated by approximately net-net 70 basis points impact from COVID19 related lockdowns, including government mandated wage payments to unavailable option employees without the corresponding revenues, cost of temporary workspace accommodations, employee transportation and facility sanitization cost.

First quarter 2021 diluted earnings per share increased 85.3% to $0.63 versus $0.34 in the same period last year. On a non-GAAP basis, the first quarter 2021 diluted earnings per share were $0.73 versus $0.44, up 65.9% on a comparable basis. The increase was driven by a combination of factors, including strong operating performance, lower other expenses, contributions from The Penny Hoarder acquisition, lower effective tax rate, and lower share count. First quarter 2021 non-GAAP diluted earnings per share exceeded the midpoint of the $0.67 to $0.70 guidance range by $0.04 per share, which was driven by a lower than projected time freight.

Turning to our client mix. On a consolidated basis, our top 10 clients represented approximately 40% of total revenues during the first quarter of 2021, down from 45% in the year ago period. The decline in function of both, broad-based growth outside of our top 10 clients on the contribution of The Penny Hoarder acquisition. In fact, we have no 10% client in both comparable quarters.

Now let me turn to slide cash flow and balance sheet items. During the quarter, cash flow from operations jumped 41.1% to $40.2 million from $28.5 million due to a combination of strong earnings and working capital swing factors. Capital expenditures decreased to 2.7 -- sorry, 2.1% percent of revenues from 2.9% of revenues in the year ago period. The decrease was largely timing driven. The company continues to invest in PC refresh, IT security, and targeted capacity expansions. Trade DSOs on a consolidated basis for the first quarter were 80 days, unchanged comparably, and then one day sequentially. The DSO was 80 days for Americas, 82 days for EMEA. Our balance sheet at 31 March remains strong with cash and cash equivalent of $112.8 million of which approximately $87.2 million or $98.3 million was held in international operations. At the quarter end, we had $48 million in borrowings outstanding, down from $63 million at the year-end under our $500 million credit facility. We continue to hedge some of the foreign exchange exposure for the second quarter and full year. We're hedged approximately 35% and 6% at a weighted average rate of 48.78 and 48.98 Philippino peso to the US dollar. In addition, our Costa Rican Colon exposure for the second quarter and full year is approx -- is hedged at approximately 37% and 28% at a weighted average rates of 584.72 and 586.43 Colon to the US dollar.

Now, let's turn to some seat count capacity utilization metrics. On a consolidated basis, we ended first quarter with approximately 45,100 seats, down approximately 3,500 seat comparatively. The reduction in capacity reflects decisions made by certain clients to permanently alter the delivery mix away from brick and mortar to home agent solution due to COVID19, coupled with consolidation of underutilized facilities. The first-quarter seat count can be further broken down to 37,600 in Americas and 7,500 in the EMEA region from 40,600 and 8,000 respectively in the year ago quarter. Capacity utilization rates at the end of the first quarter of 2021 were 74% for the Americas, and 71% for EMEA region versus 74% for Americas and 69% for EMEA in the year ago quarter. The capacity utilization rate on a combined and comparable basis increased to 74% from 73% a year ago period. Including permanent home agent and the compatible utilization calculation, we have increased the compatible capacity utilization even further.

Now let's turn to business outlook. We are increasing our full-year 2020 revenue and diluted earnings per share outlook relative to the initial guidance provided back in February 2021. The increase in the revenue outlook is driven by a broad base of existing clients across the company's vertical markets. The rather [Phonetics] increase in diluted earnings per share is primarily due to lower than projected tax rate.

Second, we continue to work with clients in determining future view of their delivery strategy between home agent and brick and mortar facilities driven by COVID19. As such, we continue to adjust our capacity footprint similar to actions taken on facility leases in 2020 as we get greater clarity around those decisions.

Third, our revenues and earnings per share assumptions for the second quarter and full-year are based on foreign exchange rates as of April 2021. Therefore, the continued volatility in foreign exchange rates between US dollar and the functional countries of the markets we serve could further impact positive or negative on revenues and both GAAP and non-GAAP earnings per share relative to the business outlook for the second quarter and full year.

Fourth, we anticipate total other interest income expense net of approximately $1.4 million and $4.8 million for the second quarter and full year respectively. In the second quarter, roughly $1 million of the $1.4 million reflects the previously discussed impact of the company's Tech and Excel technologies which is poised to accelerate its growth investments and its business and is accounted for under the equity method.

The remainder reflects the interest expense related to the acquisition of The Penny Hoarder. The amount in the other interest income expense net however exclude the potential impact of foreign exchange gains or losses.

Finally, we expect our full-year 2021 effective tax rate to be lower than previously projected due to discrete benefits relating to the Philippines tax reform, as well as stock compensation.

Considering the above factors, we anticipate the following financial results for the three months ending June 30, 2021. Revenues in the range of $443 million to 448 million. Effective tax rate of approximately 23% on both GAAP and non-GAAP basis. Fully diluted share kind of approximately $39.9 million. Diluted earnings per share of approximately $0.46 to $0.50. Non-GAAP diluted earnings per share in the range of $0.36 to $0.60. And capital expenditures in the range of $15 million to $20 million.

For the 12 months ending December 31, 2021, we anticipate the following financial results. Revenues in the range of 1.843 billion to 1.858 billion. Effective tax rate of approximately 21% and 22% on a non-GAAP basis. Fully diluted share count of approximately $40.1 million. Diluted earnings per share of approximately $2.67 to $2.77. Non-GAAP diluted earnings per share in the range of $3.02 and $3.12. Capital expenditures in the range of $47 million to $53 million.

With that, I'd like to open the call up for questions. Operator?

Questions and Answers:

Operator

Yes, thank you. [Operator Instructions] And the first question comes from Dave Koning with Baird.

David Koning -- Baird -- Analyst

Oh, yes. Hey, guys, congrats on another good quarter.

Chuck Sykes -- President and Chief Executive Officer

Thanks, David.

David Koning -- Baird -- Analyst

Yes. And I guess maybe first of all, it seems like the selling environment is pretty good. And I think, Q2 I think, you're guiding to something like flat organically. It seems like just given, more than anything, the comp in the year ago. Maybe you can talk a little bit about that. Just I think you had some extra COVID related type items in the year ago. But then, really, is the sales pipeline now that strong, it's driving accelerating growth in the second half, but is it really 2022 that you're setting up to kind of return back to a full year of pretty normalized revenue growth and maybe even better than that. Like how -- maybe how do we translate the sale -- the sales momentum into kind of when that really hits the revenue?

John Chapman -- Executive Vice President and Chief Financial Officer

Yes, you're right, David. In terms of Q2, we do have some year-over-year headwinds, we did have -- when we speak about the travel and vertical. And if you remember, last year, we spoke about how travel really held up last Q2 but this year we've really got a headwind. And so, if you look at our guidance, you're right. We -- our organic and constant currency growth this year is going to be below our kind of 4% to 6% target. And a lot of that is down to two things is the headwind from the travel. And we're not really forecasting that's going to come back. I think if you look at Q4, we probably got some year-over-year and growth there, starting in the travel. And we still got the telco, a little bit of headwind till Q3 there.

And so, I think you're -- the numbers you've got there in terms of organic constant currency for the year is probably spot on. And I think as we get into Q3 and especially Q4 with the travel, we start to see that will be in 4% to 6% range again. And that's still our target for future years. Yes, we're -- we're kind of -- we love the fact that we have no longer this large client over us. We love the fact that we've no client over 10%. We've got broad-based growth. So, yes -- so, other than those kind of headwinds, we are still really positive about the sales pipeline. We've got nice high growth companies that are giving us a nice volume increases. And so, yes, I mean, pretty much the same as we spoke to you two months ago, David. I think we're pretty much in the same position as we thought we'd be two months ago, so.

David Koning -- Baird -- Analyst

Yes. Thank you. And Chuck made some comments just about facility rationalization, some other types of cost reductions, maybe. And you talked about a further boost to margin, maybe putting some numbers around that, is that just to kind of get you to the range that you've talked about in the past toward whatever I can't remember 8.5% to 10.5% or whatever? Or is that, when you say a further boost, you mean there is ways that it potentially could even go above that over a period of time?

Chuck Sykes -- President and Chief Executive Officer

Yes, I mean our guidance this year pretty much still assumes like -- I think we said -- last quarter, we spoke about how we -- our forecast pretty much said we're going to keep the same facilities that we've got today and that's still the case. I mean we are not projecting that we will have the decisions that we need to then make permanent reductions to that facilities cost to help it boost our margins. And again, we've always said, in series [Phonetic] yes, it should improve the bottom -- the total margins. Where we really like it is, obviously, if -- the more that goes at home, the less the facilities cost, less fixed cost. You've got -- we do believe that instead of simply thinking about increasing the top end of our 8 to 10 range, we definitely think it limits the bottom end of the 8 to 10 range. And, but we're still -- we're still waiting on permanent decisions from clients to take action on those facilities. But it's not just about the cost aspect. It's about the labor market aspect. We are, clearly, if we are more virtual, especially in the domestic markets, then we fundamentally believe the access to labor is also going to be a tailwind for us. [Inaudible] we get clients making those decisions. But as we sit here today, we're probably in the same position as two months ago where the forecast really reflects the facilities we've got today. Even though when you look at our utilization, because we've got most of our people still at home, there are only 25% to 30% utilized. So, yes, I mean, I think you're right, David. We will benefit from that, exactly when and how, it's still unclear. And I would say that our guidance for the year really assumes, we're not really going to benefit from that until 2022.

David Koning -- Baird -- Analyst

Yes. Okay, thanks. And just, one real quick one, just The Penny Hoarder, how fast is that just growing on its own, its own organic growth in Q1 and how are you thinking of that longer-term?

Chuck Sykes -- President and Chief Executive Officer

Oh, I don't actually have that. But I mean it pretty much hit what we thought in Q1, David. I know we gave a 15 million number and it came in closer to 14 million, but that was just a number to help you guys understand the impact on the organic. For the year, they're still going to be in the range. Their annual guidance hasn't changed. And year-over-year, I mean, is about 20%-25% growth rate they've had, if I looked at their numbers before they came in our numbers. So, they're probably going at the 20%-25% number.

David Koning -- Baird -- Analyst

Okay, great. Well, thank you, guys.

John Chapman -- Executive Vice President and Chief Financial Officer

All right.

Operator

Thank you. And the next question comes from Vincent Colicchio with Barrington.

Vincent Colicchio -- Barrington Research -- Analyst

Yes. Nice quarter, guys. Chuck or John, I'm curious what portion of revenue guidance includes short-term revenue related to the pandemic?

John Chapman -- Executive Vice President and Chief Financial Officer

In terms of programs that we've got, simply because of the pandemic, it's basically nothing now. Clearly, just clients are doing better because of the pandemics, some is doing worse. But overall, Vince, we don't have any temporary specific COVID programs of any note to tell you about, I'm afraid.

Vincent Colicchio -- Barrington Research -- Analyst

That will be the same for the quarter I assume, is that right?

John Chapman -- Executive Vice President and Chief Financial Officer

Yes. Yes. Yes.

Vincent Colicchio -- Barrington Research -- Analyst

And given all the money coming out of Washington, how difficult is it to hire people and how concerned are you to hire people in the US?

Chuck Sykes -- President and Chief Executive Officer

Yes. Vince, I would say, for the US, it's probably our single biggest headwind that we're facing right now. And I mean, just to put it in perspective, I mean last year, this time, when we were in Q2, we saw the biggest drop in attrition and absenteeism and as soon as the unemployment benefits kicked in, it all reversed right back to normal. So, right now, we're having a very tough time in the US. But we do anticipate that when the unemployment benefit stop -- they stop, we think that's going to help us tremendously. And it's pretty specific in the US.

Vincent Colicchio -- Barrington Research -- Analyst

Thank you, guys.

Chuck Sykes -- President and Chief Executive Officer

Thanks.

Operator

Thank you. And the next question comes from Josh Vogel with Sidoti & Company.

Josh Vogel -- Sidoti & Company -- Analyst

Thank you. Good morning, Chuck and John.

Chuck Sykes -- President and Chief Executive Officer

Hey, good morning.

Josh Vogel -- Sidoti & Company -- Analyst

My first question, and I may have missed it in your early prepared remarks, Chuck, but one of your peers is noting that they're seeing a tremendous market opportunity emerging as a lot of the large enterprises are taking their captive operation, looking to outsource, because they don't have the capability or personnel in place to redesign those customer journey functions in-house anymore. So, can you just talk a little bit about what you're seeing in the marketplace and among your -- some clients?

Chuck Sykes -- President and Chief Executive Officer

Yes, I think it's an accurate statement. I don't know so much because majority redesign -- what I'm saying is companies are really wanting to build resilience into their model and outsourcing is that we've given them that flexibility. At the same time, I think it's safe to say that many of them are looking at how to implement self service. And so, the logic is why would you invest in brick and mortar facilities if at the same time you're trying to digitize your offerings? So, right now, I would just say, in general, the people are embracing outsourcing in a brief significant way. So, I mean -- so, yes, I would agree with the comments that we're seeing a lot of companies wanting to lieu their facilities to an outsourcer.

Josh Vogel -- Sidoti & Company -- Analyst

Great, thank you.

Chuck Sykes -- President and Chief Executive Officer

But I would [Overlapping Speech] the resiliency.

Josh Vogel -- Sidoti & Company -- Analyst

I got you. Thank you. And just thinking about the marketplace and your pipeline today and your guidance, what does that -- what does that assume is coming from new client wins versus expansion within the existing base?

John Chapman -- Executive Vice President and Chief Financial Officer

It's no different from historic. I mean the vast majority of our growth comes from us expanding and developing our existing client base and there's really not been a change in that, Josh. We've got -- I think we've spoken about this in the past where we retooled our sales team to go out and win brand new logos and that's still the same. We're seeing a lot of really nice logos. But if you look at their contribution to the overall revenue number, it really is unchanged in the short term.

But what -- but if I look at why we've been growing solidly in the last -- well, really, getting close to 18 months now, and when you take out a lot of the previous largest client, it's really because of the success of those that eventually those clients have got significant growth that helps us in the top line. But for this year, it's solid pipeline, but vast majority is about executing for your existing clients and getting growth in that space, especially when those clients are looking to outsource more. So, again, we all know that most of our clients got multiple outsourcers. And so, if you're executing and at the top of the ladder in terms of performance, you get the opportunity to win more of that business and that's where we want to be and that's the path of progress we see.

Chuck Sykes -- President and Chief Executive Officer

Yes, Josh, I mean when you think about it, I mean these companies that are these large Fortune 500 companies, I mean it is not that difficult for them to give you a 1,000 seats. And yet, on the other hand, the new economy clients that we're winning, I mean, it would on average, we're probably looking at a 100 seats when they get started. So, it takes 10 of those to equal one bit. And I think that's why the Fortune 500 will always be a large percent of our growth from the standpoint of revenue. However, the thing that we love is that these new economy clients, typically in the second year, that revenue is about 2.5 times to what the first year is, and by the third year, it's typically 4 to 5 times that revenue. So, we know, we keep bringing on that 10 to 1 ratio. I mean it just sustains our growth in the future. That's the key. And you really want to keep -- you don't so want to be growing your business around one or two clients. We've experienced that in our past before. It feels good when you're growing, but if it ever turns, I mean it's not, it's not so [Phonetic] pleasant. So --

Josh Vogel -- Sidoti & Company -- Analyst

Yes, thank you. Just shifting gears. Really strong performance in EMEA, certainly, in the last two quarters. I was just curious what's driving that, is there a structural shift in demand there that can drive outsized longer term growth or is it a different approach to the way you're selling over there? Can you just give some thoughts on that?

John Chapman -- Executive Vice President and Chief Financial Officer

I would say in Europe, probably the biggest thing we're benefiting from right now is our work-from-home platform, because -- and so, when you think about it, in the past, if you wanted to have -- like, you can't really offshore a lot of the Scandinavian languages. German is not too easy to offshore. But now, with our work-from-home location, we can hire and source people from all over the continents. So, it's really helping, that is to be able to capture the growth that we're winning. And we have right now in Europe, 77% of our workforce is working from home.

Josh Vogel -- Sidoti & Company -- Analyst

Got it.

Chuck Sykes -- President and Chief Executive Officer

So, I feel like that -- I feel like that's probably helping us in a pretty big way.

Josh Vogel -- Sidoti & Company -- Analyst

Okay, great. And just one last one for me. Just thoughts on how you feel about your digital portfolio today and whether you have the capabilities and offerings in place to address potential clients needs that you see in the pipeline today?

Chuck Sykes -- President and Chief Executive Officer

Yes, I would say we're feeling real good about that. The one thing about these smaller companies that I think our value proposition resonates with them. In fact, they're not just looking to us to help serve their customers, they also can look to us to help us grow their business. So, with our digital marketing, our sales and service capability, we're really in a position to help them at a critical time in their company to grow and capture and serve that demand. So, it's -- and candidly, I mean, up until probably the last three years, I would say, we weren't putting this much focus on that sector. We were -- we were mainly kind of into Fortune 1000. So, I feel very good about the success we're having right now.

Josh Vogel -- Sidoti & Company -- Analyst

Sounds great. Well, thank you for all the insights and certainly impressive results. And good luck over the balance of the year.

Chuck Sykes -- President and Chief Executive Officer

Thanks, Josh.

John Chapman -- Executive Vice President and Chief Financial Officer

Thanks, Josh.

Operator

Thank you. And we have a follow-up from Dave Koning with Baird.

David Koning -- Baird -- Analyst

Oh, yes. Hey guys, thanks. Yes, just one follow-up. I noticed you guys have had really good gross margin progression for I think it's something like 10 quarters in a row where gross margins are up year-over-year. And so, this is the first time -- they're not down that much, I think they're down 50 bps year-over-year. And your operating margins obviously continue to be really, really good. But your gross margin was down a little, year-over-year. Yes, for the first time in a while. Just wondering what's driving that and will that kind of inflect back?

John Chapman -- Executive Vice President and Chief Financial Officer

Yes, I mean, I think there's a couple of things to watch, David, because we always say we don't like to guide gross margin because if you look at the difference in Europe, in the US, and nearshore, and offshore, you get? So, there is a bit of that in there, David. But I think the rest of it is really about the challenges that Chuck spoke about in the US. And if I looked at across the board, that's the year over year, that's the really biggest impact is there's a lot of the stimulus checks and the challenges we had in Q1 in the US, they are billing in [Phonetic] those numbers and they were the main reason why, if you look year-over-year, you saw a little dip in the gross margin. Plus, remember, as Europe get slightly bigger as a proportion of our business that also can adjust the number. But yes, I mean, if I look in terms of where I think we've got opportunity? It's the US. And we think we'll get there as these -- the stimulus and the unemployment starts to unwind that we'll get those back, people back to working, get the attrition, the absenteeism down again.

David Koning -- Baird -- Analyst

Yes, sure. Great, thank you. Thank you.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Chuck Sykes -- President and Chief Executive Officer

John Chapman -- Executive Vice President and Chief Financial Officer

David Koning -- Baird -- Analyst

Vincent Colicchio -- Barrington Research -- Analyst

Josh Vogel -- Sidoti & Company -- Analyst

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